Construction Industry VAT changes
From 1 March 2021, the responsibility for accounting for VAT on building works will shift up the supply chain to larger contractors.
Building sub-contractors will no longer charge VAT to other businesses in the construction industry. Instead, their building customers will account for the VAT as both a purchase and sale by doing a reverse charge entry on their own VAT returns.
This VAT reverse charge only applies for invoices where all these conditions apply:
• the work done would be subject to 20% or 5% VAT
• the work falls within the scope of the construction industry scheme (CIS)
• the customer is registered for both CIS and VAT, something the supplier needs to check.
The VAT reverse charge will also apply to materials supplied as part of the building work, irrespective of whether the subcontractor raises separate sales invoices for labour and goods.
The subcontractor must include a Construction Industry VAT changes note on their invoice to tell their customer that the reverse charge applies, such as “reverse charge – customer to pay the VAT to HMRC.” The invoice must also state the amount of VAT the customer must account for, or the rate of VAT on each item on the bill.
The reverse charge will not apply where the customer is an end user or intermediary supplier for the work in question. ‘End user’ means the building on which the work is done is not being sold on to anyone else. An intermediary is a business connected with the end user by being in the same corporate group, or having an interest in the same land, such as landlord and tenant.
We can help you prepare your accounting system for this change in VAT from 1 March 2021.